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Renewable Portfolio Standards to come to the Philippines: Will they be effective at driving a new RE future?

In December 2017, following nearly a decade of delay, the Philippine Department of Energy (DOE) promulgated the rules for a Renewable Portfolio Standards (RPS) scheme. This is to be coupled with a Renewable Energy Market (REM or RE Market), the rules for which are yet to be finalised. Long delays have been a hallmark of electricity reforms in the Philippines, affecting many of the programs mandated by the 2001 Electric Power Industry Reform Act, or the 2008 Renewable Energy Act. The RPS and REM are among the last remaining programs that have not yet been at least partially implemented. Although RE’s global growth has brought environmental and energy security, and – increasingly – cost benefits to electricity consumers around the world. The current DOE, under the Duterte administration, is not actively favouring RE, but rather touts itself as being “technology neutral”. So will the new RPS be effective at increasing the amount of new RE being developed in the Philippines?

Background

Along with Feed-in Tariffs and others, RPS with an RE Market is a well-known mechanism for facilitating renewable energy developments and is used in various markets around the world. Together, they represent a market-based policy that works by setting a minimum proportion of electricity sales/consumption that must be sourced from RE. Renewable Energy Certificates (RECs) are allocated to generation from RE plants, and can be sold in the RE Market to electricity suppliers/retailers, who use them to bridge any gap they may have between the proportion they source from RE (via PPAs or from their own generators) and the minimum proportion required under the RPS. The RPS minimum can be increased over time according to government RE targets.

RPS schemes have been implemented in countries around the world, perhaps most notably in the United States, where close to 30 states have adopted RPS targets. Most of these policies have been in place for at least 10 years and therefore offer great material for studying the effect of RPS on RE growth. According to a 2017 study by the Lawrence Berkeley National Laboratory, RPS requirements have driven around half of total US RE growth since 2000, albeit not a strict attribution as some of this growth would have occurred even without RPS; other drivers of RE growth include cost declines and other incentives. In Texas and the Midwest, RPS is less of a direct driver of RE growth due to favourable wind economics in the region meaning that growth would have occurred independently of any RPS, while in the West, Northeast, and the Mid-Atlantic, RPS plays a larger role with RE growth being driven more directly by RPS requirements.

Philippines RPS and RE Market

The RPS rules were released in December 2017. Per RPS rules, REM operations must commence by December 2018. The REM rules must also be promulgated by mid-year 2018; draft rules were released in January. 2019 is expected to be the transition year when mandated participants can make their preparations for the mandatory RPS compliance, which will commence in 2020.

At this point, the most crucial step is the establishment of REM by December 2018, as any delay in establishment of REM will mean delay in RPS implementation.

The RPS rules do not set a hard long-term minimum RE share; instead, they reference an “aspirational target” of 35% of generation from RE by 2030. In law, “aspirational” means a hope or intention but does not create a legally binding obligation.

All existing RE, including large hydro and geothermal, are included in this aspirational target. When the RE Act came out in 2008, RE made up around 34% of generation, but this has since declined to around 24-25% and will decline further over the next few years as new coal plants continue to come online, with only small amounts of RE in the works with any certainty.

While targets are discussed in overall terms, the RPS requirements and RECs are defined in terms of RE that has come online since 2008 (when the RE Act became law), which excludes most existing hydro and geothermal plants. This means that the link between RPS requirements and overall RE targets is not obvious or intuitive, but requires analysis to understand. Obscuring things further is the fact that RPS requirements are in terms of net sales, while RECs are allocated based on generation, thus ignoring losses etc. that amount to around 18% of generation. Adding further to the disconnect between the RPS requirement and overall RE share is that, as part of the transition to the new scheme, RECs will be generated for two years before they are required.

The RPS rules also do not plot a clear path regarding the minimum requirement leading up to 2030. At a minimum, the annual RPS requirement must increase every year by at least one percent (1%), and this is to be reviewed annually and adjusted by the DOE. At this time, the DOE has not signalled any intention to increase this.

A rather unique aspect of Philippine RPS rules is the sanction for noncompliance. In most countries/states that implement RPS, noncompliant participants pay alternative compliance payment (ACP) for every MWh of REC shortfall, which is usually a premium on prevailing spot market REC prices. In the Philippines however, noncompliance is a criminal liability in which officers of noncompliant entities face upon conviction, imprisonment or pay a fine twice the amount of costs avoided for noncompliance. It is a compliance mechanism that imposes additional cost to the government that can otherwise be more effectively addressed by a market mechanism such as ACP.

What RPS means for RE in the Philippines

Pöyry’s initial analysis indicates that a 1% annual increment will only result in an overall RE share of generation of around 23% in 2030, which is well below the aspirational target of 35%, and less than the RE share in 2017. Continuation of a 1% increment would also mean that the RPS requirement would not be the direct cause of any new RE build until around 2029 or 2030, even assuming almost no new RE additions come in for other reasons, which seems unrealistic given how competitive solar PV has become.

In order for the RPS to require an RE share of 35% in 2030, the annual incremental percentage will have to be raised significantly higher than the initially set annual increment of 1%. If this is left to the next administration after the next elections in 2022, they would need to increase the annual increment to an ambitious 4%.

Optimistically, the Philippines can be commended for pursuing an RPS program – the first in Southeast Asia – that, in theory, will drive the growth of clean, economic renewable energy. It provides a mechanism by which the government can, in future, increase the proportion of renewable energy in the power sector, while allowing the market to determine the least-cost path to achieving it. However, considering the limited ambitions of the program’s RE targets as they currently stand, it seems that, at least in the near term, RE in the Philippines will need to compete on an economic basis, and that the DOE is true to its word when it says that it is “technology neutral”.

Published in the May-June 2018 Issue of the Asian Power Magazine, written by Alastair Duffy and Rhesa Janubas.